Opening a CFD position is only one part of your trading. The next part is to manage the position to make sure that the trade is doing what you expect it to do and if it's not doing what you expect it to do, to be able get out of it quickly.
CFDs have inherent risks and benefits that you have to be aware of but there are types of orders that you can use to manage your CFD trades.
Risk Management Tools
Stop-Loss Order (SLO) – One of the most effective ways to manage your CFD trade is to use a stop-loss order, which will take you out of a trade once the price of a CFD moves against you. A stop-loss point or level is a pre-determined price at which you want to get out of a trade if it goes against you. Ideally, you should place your stop-loss order using the electronic trading software as soon as you open a CFD position.
One thing to note and remember with stop-loss orders though is that even if you have nominated a stop-loss or exit level, there is a possibility that your position would not be closed out at exactly the nominated price if there is insufficient available buyer volume to take out your order size or the share CFD price gaps vary widely. Most CFD providers offer stop-loss orders as a regular feature of their trading platform at no extra cost. Make sure that your CFD provider allows for stop-loss orders and allows you to change them frequently and that they can be done online or over the phone for free.
Guaranteed Stop-Loss Order (GSLO) – This variation on the stop-loss order discussed above guarantees that your CFDs are taken out (bought) at a pre-set price even if the share CFD price gaps widely against you. A few CFD providers now offer GSLO, but you have to pay a small price to use it because the guarantee is a premium service. Unlike the regular stop-loss order that can be placed electronically on the trading platform, GSLO can only be placed by calling your CFD provider on the telephone during market hours.
One Cancels (the) Other (OCO) – This is an advanced type of order which links two orders. In this instance the execution of the first order will mean the automatic cancellation of the other order linked to it. A usual application of an OCO is to link a limit order (a Limit Order is an order to buy or sell a share at a specific price. The order will only be carried out by the broker at that price, or a better one. If the broker can't fulfil the limit order, it lapses.) with a stop order.
If Done Order – Similar to an OCO, an 'if done' order links two orders together. The difference in this type of order is that once the first order is executed the second one is automatically entered into. A usual application of this order is to set a limit order and 'if-done' a stop-loss level.
Money Management
While the stop loss and other related orders can be used after you've already opened a trade, money management is an important tool that you can use to protect your trading capital even before you enter a trade.
When it comes to trading, money management generally refers to how much money you allocate for each trade. This is also called position sizing. As the term implies, your money management strategy should tell you how much money you should put in a trade considering the expected risk/return. For example, you may only want to put in $3,000 on a particular trade because you only expect a small return from it. On the other hand, you may want to allocate $8,000 to another trade because you think it will give you a higher return than the other trade.
Trade Management Tools
Like any other professionals with specific tools to do their job, you will need tools to help you do your trading properly and profitably. Here are some of the basic tools that you should consider:
Market news and information – whether you want to use fundamental analysis (company valuation method) or technical analysis (share price movement method), there are various sources of trading and market information that can be helpful in your trading. Be careful and be smart in selecting which source you use so that you won't be distracted by excessive information.
Newspapers – In Australia some of the newspapers with informative business sections include The Australian Financial Review, The Australian, The Sydney Morning Herald, The Age, The Courier Mail, The West Australian, The Advertiser and The Canberra Times.
Web sites – one of the advantages of trading in the internet age is the availability of information literally at your fingertip just by clicking the computer mouse. Be selective which web sites you use. Evaluate a few of them for a few weeks or a month and decide which one is the most helpful for you.
Australian Prudential Regulation Authority (APRA) www.apra.gov.au
Australian Securities and Investment Commission (ASIC) www.asic.gov.au
Australian Stock Exchange (ASX) www.asx.gov.au
Sydney Futures Exchange (SFE) www.sfe.com.au
Australian Bureau of Statistics (ABS) www.statistics.gov.au
Department of Treasury www.treasury.gov.au
International Monetary Fund (IMF) www.imf.com
Reserve Bank of Australia (RBA) www.rba.gov.au
The Australian Financial Review Dictionary of Investment Terms www.invesco.com.au
Tip sheets or newsletters – for those who don't want to do a lot of their own analysis, tip sheet services may be a good place to start because many of these companies have professional analysts monitoring the market all the time. Third party analysis aside, it is still ideal and highly recommended that you do your own analysis of the shares/CFDs you want to trade.
Data providers – trading data (price, volume and other relevant details) are a must if you want to keep track of your trading position. You need to be able to know the price movement and the volume of transaction on the CFDs you trade. While there are web sites where you can see the daily closing prices, you need a data provider that can give you historical data as well as current and up-to-the minute information that is critical to your trading. Data providers will charge you an annual subscription fee and some have variable rates depending on the level or detail of the information you require. Scout around for the most reliable provider and do not subscribe based on price alone.
Software programs – Metastock, feature rich charting package. You can program your own scans, create your own indicators or use the many that are included. Because it has been around for quite some there are many non-official web sites with codes, ideas and guides. Next is Tradesim: This is a tool that works with Metastock for advanced traders with skills in back testing. It allows you to test a method with varying parameters over a large parcel of shares and over many years to determine the results the system would have achieved.
CFD Trading education – Since CFDs are a relatively new financial product compared to shares, you will be better off getting some 'organised' CFD education. Though most CFD providers offer some form of free education, they are mostly limited to training you on how to use their platform or how to place trades. If you want to know more about trading strategies, trading on margin or the use of leverage, you have to learn from individuals or some training companies that have the expertise in trading CFDs.
Written by Peter Mathers (Trading Analyst AFSL 317817) owner of www.tradinglounge.com.au which offers general trading advice.
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